Last update: 28th February 2000
Ascending triangle: A triangle with a horizontal resistance forming the upper boundary, which, if volume is correct (falling throughout the pattern) and if breakout is correct (not to close to the apex) can portend a rally.
Breakout: A point outside a completed geometric pattern. Breakout indicates that the pattern in question has been activated such that it gives a minimum prediction.
Cascading patterns: A series of patterns indicating the extension of trend from short to medium term or medium to long term. In this configuration, the short term pattern could be any pattern: a double top or bottom, a head and shoulders (top or bottom), or even a triangle. The short term pattern then becomes the head of a head and shoulders top or bottom. A reversal of a long term trend often begins with a short term pattern. As the reversal of the trend becomes clearer, a larger, more significant pattern often develops in casdcading fashion. The phenomenon of cascading patterns is thus important in confirming the reversal of a long term trend.
Channel: A pattern comprising two parallel lines that circumscribe a price trend. The parallel comprise a support (the lower line) and a resistance (the upper line). The channel gives rise to presumption that price will not pass the support or resistance. But ultimately, all channels break. Thus the predictive value of a channel is subject to rules of interpretation which give a probability of turn or breakout depending on the relative term of the channel and the geometric patterns, if any, that are contained within the channel.
Chart: A two dimensional representation of the change in price and turnover or volume of a stock or index.
Consolidation: The process in a market where prices
accumulate at a certain level before reversing or continuing.
Consolidation indicates exhaustion of a market move, but it does not indicate a change in the trend of the market. It is a period of uncertainty. It may be characterized by either volatility or the absence of trading. But it is a short term phenomenon.
Continuation: The process whereby a market proceeds in the direction of the current trend after a period of consolidation. A continuation may be distinguished from a reversal. A geometric pattern may indicate either a continuation of a trend or the reversal of the trend.
Descending triangle: A triangle with a horizontal support as the lower boundary, suggesting that a breakout downside is impending.
Double bottom: A geometric pattern comprising two bottoms resembling a “W” on the chart. The pattern indicates a reversal of trend from falling to rising. To be valid it must be accompanied by low volume on the left side and high volume on the right side and after breakout.
Double top: A geometric pattern comprising two tops resembling an “M” on the chart. It is usually accompanied by higher volume on the first top than on the second top. However, if it breaks through the neckline with sufficient margin, it may be considered valid, notwithstanding the accompanying volume pattern.
Downside: A breakout which penetrates a support and indicates an impending fall in the market is referred to as a breakout “downside”.
False breakout: The phenomenon whereby price breaks out of a geometric pattern, only to fall back into the pattern before advancing very far. False breakouts are likely to occur in the case of a breakout upside that is not accompanied by strong volume. But they can occur in the case of a downside breakout (ie, breakout from a top or a from the lower boundary of a triangle) without warning, most commonly where a triangle breaks out close to its apex.
Head and shoulders top: A geometric pattern comprising a top forming a left shoulder, a higher top forming a head and third top being lower than the head, forming a right shoulder. The pattern indicates a reversal of trend from rising to falling
Leg support or resistance: A support or resistance parallel to a neckline touching a turn that is close to the neckline. In the case of a head and shoulders top the leg support can send the price back above the neckline, cancelling the pattern. The resulting pattern is a head and shoulders top on two little legs (or feet, if you prefer). The same phenomenon can be found in reverse head and shoulders patterns and double tops and bottoms.
Logarithmic target: A target measured by expressing the measurement distance as a percentage and applying that percentage to the point of breakout. Thus a fall from 10 to 7 within a geometric top pattern will give a measurement distance of 3/10 or 30%. A breakout at 7 from a valid geometric pattern would give a prediction of a fall of a further 30%; ie, 2.1 points (or currency units if we are measuring a stock). Thus the logarithmic target would be 7 - 2.1 = 4.9. (Compare the arithmetic target for the equivalent pattern, which would simply take the number of units in the measurement distance and subtract them from the point of breakout; ie, 7 – 3 = 4.)
Logarithmic targets are useful in the case of predictions for long term patterns spanning several years such as we have seen recently in Japan (October 1998) and Taiwan ( February 5th 1999).
Measurement distance: the interval on a chart between the
two most distant vertical points in a geometric pattern. The
measurement distance is applied to the point of breakout from a
geometric pattern to give a target.
Neckline: A support or resistance line that forms the boundary of a top or bottom pattern such as double top or double bottom, or head and shoulders top or reverse head and shoulders. Breakout occurs when the price of a stock or level of an index passes the neckline. Measurement of a target is taken from the neckline at the point of breakout. The measurement distance is taken from the neckline to the most distant vertical point in the geometric pattern.
Pattern or Geometric Pattern: One of a series of
recognized patterns that is formed by joining the price points on
In essence, a geometric pattern gives rise to the presumption that at least one half of a trend has occurred, allowing the trader to take advantage of the other half of the market move and giving hope that the trend will continue further by reason of a chain of patterns.
The geometric patterns comprise the head and shoulders top, reverse head and shoulders, double top, triple top, double bottom triple bottom, triangles, pennants and wedges.
Pennant: a small triangle indicating a halfway point in a rapid market move. The pennant should be preceded by an almost vertical market move, called the pole. The pole will be the distance from a breakout from a support or resistance or geometric pattern to the triangular part of the pennant. In the case of a pennant pointing up, the pole should be attended by high volume.
Price: a point on the chart indicating the price of the stock traded. Price is represented by the right hand Y axis on my charts.
Pullback: A brief reversal of trend after a breakout from a pattern. A pullback can confirm the breakout where price returns to the neckline (or boundary of a triangle) and then rebounds in the direction of the breakout. In difficult cases, where multiple necklines can be drawn, a pullback can confirm the location of a neckline.
Resistance: A point on a chart, represented by a straight line connecting at least two points, at which price may be expected to turn down. A resistance may be either horizontal or diagonal. Resistance will be strong or weak depending on factors such as the number of points touching the resistance and the period during which the resistance occurs. Thus a long term resistance touching many points will be a strong impediment to a medium term rally. Horizontal resistance will only be strong if volume accompanied the previous occurrence of the price in question. Diagonal resistance does not depend on volume for its efficacy.
Resistance at a point on a chart may comprise multiple intersecting lines. These should be considered the strongest of resistances. But alas, often it is only after the event that such multiple resistances can be discerned. Resistance can be inferred by inferring parallelism to a support. (A bit of an art).
Reversal: The change in direction of a trend as evidenced by a geometric pattern.
Reverse head and shoulders: A bottom pattern indicating that a falling trend has reversed into a rising trend. Volume should increase throughout the pattern for it to be reliable with the highest surge of volume occurring on the right hand side of the right shoulder. The reverse head and shoulders is similar in function to a double bottom, but it has higher predictive value due to the fact that the neckline can be inferred more readily (having three points where price touches the neckline, whereas the double bottom may have only one).
Support: The inverse of a resistance (see above): a line indicating that the price is unlikely to fall below such line.
Symmetry: head and shoulders tops and bottoms often exhibit symmetry in their formation. If a pattern has two left shoulders, it may be expected to have to right shoulders. This is especially true of large capital stocks that form patterns over the course of a year. Further, in the case of long term patterns, one may expect symmetry in the period of formation of a right shoulder to an extent similar to that of the left shoulder. Thus if a left shoulder took six months to form, one might expect the right shoulder to take a similar period. However, there is no rule that symmetry shall apply. Symmetry is merely a presumption.
Target: an interval on the Y axis of a chart equivalent to the measurement distance of a pattern indicating the price of a stock or the level of and index which may be expected as the minimum change following a breakout from a valid geometric pattern
Term: a period for classifying and comparing trends and geometric patterns. I use the terms long term, medium term and short term. They are essentially relative terms indicating ranking forces. A long term pattern has more predictive force than a short term pattern. A long term trend may be presumed to continue over a short term pattern. I try to keep to the following classification: short term = less than three months; medium term = less than one year; long term = one year or more. But the terms are essentially relative.
Time limit: The period equivalent to the formation of a geometric pattern within which a target must be reached failing which the prediction will be cancelled.
Top: a turn in price on the chart after a rise. By itself, it has no predictive value. But if it forms into a double top or a head and shoulders top, it comprises a geometric pattern which may have predictive value.
Trend: A prevailing direction of the market, either up or down, during the course of a term. Thus the trend is always relative to the term; ie, short term, medium term or long term. The short term trend could be up while the long term trend is still down. One should always be careful when using this term “trend” to specify the term to which the trend is related.
Triangle: A geometric pattern having a top boundary sloping down or horizontal and a bottom boundary sloping up or horizontal such that the two lines intersect at an apex. The two boundaries are a support and resistance respectively. So the pattern requires the price to turn four times before the pattern can be valid. The triangle is an ambiguous pattern. Breakout could be in either direction. If the pattern breaks out upside, it indicates that the trend is up. If the pattern breaks out from the support (ie, the bottom line), it indicates that the trend is down. Thus a triangle can be either a reversal pattern or a continuation pattern.
Triangles can be ascending – the resistance is horizontal – price can be expected to break upside: or descending the support is horizontal – prices can be expected to break downside.
Turnover: The currency value of the stock traded or the total currency value of trade in a market for a period of time, usually one day. Turnover is used in contradistinction to volume of shares.
Upside: The direction of a breakout in relation to a geometric pattern or a resistance. A breakout that breaks through a resistance is referred to as a breakout upside. It portends a rally.
Valid pattern: A geometric pattern that is well formed and which has the correct volume pattern accompanying it is said to be valid. Patterns that are not valid are said to be dubious or doubtful. A valid pattern has a high probability of reaching target.
Value: The same as turnover, i.e., the currency value of a market or share for a trading period.
Volume: A generic term describing the level of activity in a market but referring specifically to the number of shares traded in a market or of a particular stock. I use the term in the general sense to indicate either volume of shares or the value of turnover for a trading period.
Wedge: A triangle with both support and resistance sloping in the same direction. If the wedge slops down, the wedge is said to be a falling wedge. Breakout is expected to be upside and the target will be the top of the wedge. If the wedge slopes up the implication is bearish and breakout is to be expected downside with the target being the lowest turn in the wedge. Volume should fall off during the formation of the wedge and the duration of formation should not exceed a few months.
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